In order to get started with foreign currency exchange or forex trading, you should first learn about the different aspects of the market. One of these crucial concepts is understanding what spread means in forex. The main reason is that it factors into your profits or losses when trading in the market.
This article will define and explain the meaning of spread, its types, and how to calculate it. So let’s start now.
What is Spread in Forex?
Let’s figure out the concept first:
The difference between buy and sell prices for a currency is called the spread in forex. Brokers always have higher spreads, meaning that if you open up a position to close it right away, your loss will be precisely equal to the amount by which they differ from one another in value. This means taking on more risk than simply buying at a low cost.
In order to make a profit on online brokerages, you need the market to move in your favor by an amount that is at least equal to the spread. Spreads can be fixed or variable but most brokerages nowadays offer variable spreads, which means they may change depending on market conditions.
Keep in mind that in forex trading, when you buy a currency pair, you are purchasing the base currency and simultaneously selling the quote currency. The bid price is how much it costs to buy the base currency, while the asking price is how much it will cost to sell it. See low spread broker Eightcap review if you want to trade with an industry professional.
What Types of Spreads are in Forex?
Let’s stay a little bit on the spread types we mentioned above.
There are 2 main spread types you can meet when trading forex: fixed and variable.
Fixed spreads are offered by brokerage companies that operate as market makers or ‘’dealing desk’’ models. This means that regardless of the current market conditions, the spread remains fixed and does not change.
Trading with fixed spreads offers an inexpensive option for those who don’t have a lot of money to start trading. Fixed spreads also make calculating transaction costs more predictable, as you know what to expect when opening trades.
Variable spreads are always changing, as the difference between the bid and ask prices of currency pairs is constantly fluctuating. They’re offered by non-dealing desk brokers, who get their pricing from multiple liquidity providers without intervention from a dealing desk.
When you trade Forex with variable spreads, it means that your order won’t get canceled because the price changes. This happens because the spread will change depending on how good the market conditions are. Trading Forex with variable spreads can also mean getting better prices, especially if you compare it to getting prices from multiple liquidity providers.
Note that knowing the concept of spread is not the only thing you have to take into account. Choosing a reliable broker and trading platform is important as well. If you’re still looking for the best choice, see here BlackBull Markets review.
Why does the spread change in forex?
As you already know, when the difference between the buy and sell prices of a currency pair changes, this is called the ‘’spread’’. This is how Forex works – you always trade with a variable spread. The spread widens if there is an important news announcement or an event that makes the markets more volatile. One of the downsides of a variable spread is that, if it widens too much, your positions could be closed or you might have to put more money in to keep them open.
How to calculate the spread in forex
Well, now that we figure out the main concepts, let’s take a look at how to calculate spread in forex.
Spread can be calculated by subtracting the bid price from the asking price. For example, if you are trading GBP/USD at 1.3090/1.3092, then the spread would be 0.0002 (2 pips).
A wider spread means it costs more to trade between those two prices, while a narrower spread indicates that trading is less expensive. Traders often prefer tighter spreads as they make trading cheaper overall.
Conclusion
Spread is an important concept in Forex trading, and calculating it correctly is crucial to your success. Hopefully, the article has helped you understand what spread is, how it works, and how you can use it to your advantage. As always, practice with a demo account before putting any real money on the line, and never trade more than you can lose.
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